• With a GDP growth of 3.1 % the outlook for the CEE region is stronger than for Western Europe (Euro zone 1.0 %)

• It is however a two-speed recovery, with some countries growing fast and some lagging behind

• Corporate sector growing faster than retail

The countries in Central and Eastern Europe (CEE) have weathered the financial crisis quite well to date, proving that the widespread concerns and scepticism prevailing a year ago were exaggerated. The recovery is underway, and the economists of UniCredit have increased their 2010 GDP growth forecast for the region from 2.8 % to 3.1 %. In solid positions are Turkey (5.6 %), Russia (3.4 %) and Slovakia (3.5 %), whereas some others are finding it harder to exit the recession, like Croatia (-1.5 %) or Bulgaria (-1.0). In other words, this remains a two-speed recovery for the region. The main risks come from the Eurozone, which has been experiencing a resurgence in financial market tensions triggered by concerns on sovereign debt.

Export is the only significant growth driver: the more benign GDP growth figure in 1Q10 (-3.6% yoy) compared with 4Q09 (-5.9%) was almost entirely due to stronger external demand. But while export looks set to expand at a healthy pace, it will not be enough to generate a sustained revival. Unfortunately, there are still no signs that the external upturn, endangered by the sovereign debt crisis in Europe, is feeding through to stronger domestic demand. Recent retail sales and confidence indicators provide further evidence of the weakness of the consumer sector. Fundamental determinants of households’ consumer spending also bode ill: the rebalancing of the labor market does not look to be over with wages and employment still under downward pressure. What’s more, belt-tightening measures related to public administration are likely to enfeeble the already weak household recovery. Rebalancing of the external position, on the other hand, has progressed at a faster than expected pace (the 12M current account gap as of April shrunk to 5.6% of GDP, from 9% in the end of 2009 and 24% in 2008), and still looks some way off.

While differences in country performances are likely to continue in the coming months, several growth indicators referring to industrial production and export confirm that the recovery remains on track. Especially Russia and Estonia have sped up in the last three months, showing their solid potential. With a still growing demand coming from Asia as well as Western Europe, exports are the key source of growth across the region. Benefitting from this are especially those countries most open to the global trade cycle. However, the difference between the confidence indicators and the real production data has widened a bit.

Two speed of recovery: corporate sector outperforming the retail sector

Due to austerity packages implemented as an answer to fiscal problems and still high unemployment, private consumption remains low and there is no change in this picture to be expected in the coming quarter. On the contrary, lending dynamics are very soft and wage growth is slower now than in the pre-crisis period, adding to the weak performance of the retail sector. Domestic demand should therefore continue to lag behind, with exports remaining the main engine of the recovery and of accelerating industrial production.

However, the good news on the domestic side is that a number of countries are undertaking wide-ranging infrastructure development programs. To give some examples: Poland and the Ukraine are in preparation for the EURO 2012, Kazakhstan is in a drive to modernize its infrastructure, Russia is in preparation for the Sochi 2014 Olympics and Serbia has several projects ongoing as well. These programs are spilling over into increased levels of construction activity and are helping to ease the hang-over from the previous construction boom. All in all the CEE region remains an important growth driver, having great potential and slowly but steadily regaining confidence in the aftermath of the crisis.

About UniCredit Group

UniCredit Group is a major international financial institution with strong roots in 22 European countries as well as representative offices in 27 other markets, approximately 9,800 branches and more than 165,000 employees at 31 December 2009.

UniCredit Group is market leader in Central and Eastern Europe, where it is one of the largest players in the banking market, with an extensive network of approximately 4,000 branches.

The Group operates in the following CEE countries: Azerbaijan, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Poland, Romania, Russia, Serbia, Slovakia, Slovenia, Turkey and Ukraine.